Monday, April 16, 2012

Times op-ed: EB-5 program lacks credibility, needs reform, but "solutions are straightforward" (really?)

A New York Times op-ed today, Making Visas-for-Dollars Work, suggests that the EB-5 program can and must be fixed. Writes author Ann Lee a senior fellow at the center-left think tank Demos and the author of “What the U.S. Can Learn From China”:
Given how many high-worth investors are clamoring to enter the United States, the program could have a significant effect on American unemployment. Indeed, it has brought in some $1 billion over the last fiscal year, and the President’s Council on Jobs and Competitiveness has called for the program to be “radically” expanded over the next few years.

Unfortunately, the program is so rife with fraud and corruption that it could actually have the opposite impact and deter investment. To regain its credibility, the program must make a number of changes to enable more transparency and demand more competence from its operators.

The most egregious problems with the EB-5 program can be found in its 218 regional centers, which work with private-sector brokers to identify local investments and direct foreign participants to them. Examples abound of centers and brokers playing down risky investments and misrepresenting how the program works, including a promise that EB-5 investments are guaranteed by the federal government — when the government in fact does nothing of the sort. Many investments have failed to create the required 10 jobs and even gone bankrupt, leaving the investor without his money or his green card.
That's not the half of it. It goes far, far deeper, such as misrepresenting the project itself. And the regional centers not merely "work with private-sector brokers," that's what they are: private businesses.

Noticing the press

The author has noticed some press coverage:
For the time being, these problems haven’t turned the tide of interest in the EB-5 program. But that could change: recent high-profile investigations by Reuters and Businessweek, as well as a warning against fraudulent brokers by the Chinese Supreme People’s Court, could start having a significant deterrent effect, especially since other countries, like Canada, are following America’s lead with their own versions of the program.
I'd say those high-profile investigations could go even farther, as with my comments on and extensions of the Reuters and BusinessWeek articles. The issue of fraud goes much deeper, extended to the widespread practice of gerrymandering, which is apparently accepted by the federal government.

Easy path to reform?

Lee suggests the path to reform is simple:
Fortunately, the solutions are straightforward. The federal government needs to rein in freewheeling brokers with heavier penalties for misrepresenting investments, hire more business-savvy administrators and make the entire process more transparent, so that applicants know why their money was accepted or rejected.
I highly doubt this. First, it's not a question about "heavier penalties." There is little or no enforcement to begin with; otherwise the New York City Regional Center and its partners would not have gotten away with misrepresenting and investment into the "Brooklyn Arena Infrastructure and Transportation Improvement Fund" as an investment in the Barclays Center arena, complete with endorsement by the NBA.

The need to make the process more transparent is enormous, not simply incremental. For example, the United States Citizenship and Immigration Services (USCIS), the federal agency in charge of EB-5, refused to make public the economist's report on job creation for the Atlantic Yards EB-5 project. Without making public such reports on purported job creation, the federal government stymies any opportunity for an honest evaluation.

Moreover, this commentary has not grappled with two issues bedeviling the EB-5 program:

  • do immigrant investors really deserve job-creation credit based on the whole pot of money in the project, not just theirs, especially if their investment is not seed money?
  • should EB-5 investors deserve job-creation credit for low-interest loans that are simply substituting for higher-cost capital? 

The fundamental question: who benefits? It's clear the immigrants benefit, as do the developers and the middlemen. The evidence of public benefit, however legitimate in part, is far more tenuous.

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